Real Time Economics: Fed Sparks Market Rally

Fed Chairman Jerome Powell speaking at the Economic Club of New York.
Photo:
justin lane/epa-efe/rex/Shutterstock

Nov 29, 2018 4:54 am ET

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Fed Chairman Jerome Powell's subtle shift on interest rates was a big relief for markets. Inflation data out this morning may help bolster the case for a pause after December's policy meeting.

Good morning. Jeff Sparshott here to take you through key developments in the global economy. We'll look at crashing oil prices, a key moment for the U.S. and China on trade, declining U.S. life expectancy, and more economic warning signals. Let us know what you think by replying to this email.

PUT ON YOUR RALLY CAP

Federal Reserve Chairman Jerome Powell ignited a market rally Wednesday when he said interest rates are “just below” neutral. It doesn't sound like much but investors took it as a sign the Fed will stop raising rates sooner rather than later and keep the economy from intentionally cooling.

A neutral rate would neither speed nor slow economic growth. No one knows the precise level but Mr. Powell as recently as October said the Fed’s benchmark was a “long way” away, Nick Timiraos reports. The Fed is still expected to raise rates at its Dec. 18-19 meeting; Mr. Powell gave investors hope for a pause in 2019.

WHAT TO WATCH TODAY

U.S. personal income and consumer spending for October, out at 8:30 a.m. ET, are both expected to increase 0.4% from the prior month.

U.S. crude oil fell below $50 for the first time since October 2017 amid mounting pressure on OPEC and its allies to rein in supply and bolster prices. Cheap oil is a mixed bag for the U.S. economy: consumers get a break on gasoline prices but energy firms are likely to hold off on new investment and hiring.

WELL, HOW DID I GET HERE?

President Trump and President Xi meet this weekend to hash out differences on trade. The showdown wasn't inevitable. The WSJ's Bob Davis and Lingling Wei take a deep dive into the dispute's origins and escalation. It's worth a click but briefly:

China’s leaders misread Mr. Trump as a businessman first, rather than the politician whose fixation on trade had helped carry him into office. And the Trump administration's pressure on China’s leaders has kept them off balance but hasn’t persuaded them to change their policies. The result: China and the U.S. are on the brink of a new Cold War, with tensions over trade at the top of the agenda. Both are erecting increasingly punitive tariff barriers, putting into play their global reputations and the fate of major industries.

TALK THE TALK

American retailers are getting tough with Chinese suppliers as import tariffs bite, cutting orders, negotiating down prices and demanding faster turnarounds. Walmart and Home Depot have advanced some purchases to get ahead of any step-up in U.S. tariffs. Amazon.com cut back purchases and orders for some private-label products that it can no longer sell profitably. Dollar Tree said it has negotiated price concessions from vendors, canceled orders and changed its product mix.

China's manufacturers of handbags, lighting, footwear and other products say they are feeling the strain. Many are trying to find new customers outside the U.S., and some have resorted to offering discounts in a bid to halt a slide in orders, Natasha Khan and Yifan Wang report.

WALK THE WALK

Tariffs aren't showing up in overall U.S. trade figures. The U.S. deficit in goods widened in October for the fifth consecutive month. The latest data won't be welcome at the White House, which wants to trim the trade gap. But there are much broader forces at play—including the relative strength of the U.S. economy and the dollar—that are overwhelming Trump administration efforts to micromanage commercial flows.

NOT-SO-GREAT EXPECTATIONS

Life expectancy for Americans fell again last year, pushed down by the sharpest annual increase in suicides in nearly a decade and a continued rise in deaths from powerful opioid drugs. Influenza, pneumonia and diabetes also factored into the increase, Betsy McKay reports.

Life expectancy is an important measure of a nation’s prosperity. The 2017 data paint a dark picture of well-being in the U.S., reflecting the effects of addiction and despair, as well as diseases plaguing an aging population and people with less access to health care. “While the economy may be recovering at the macro level, it’s very uncertain whether it’s affecting the lives of these people,” said University of Rochester Medical Center professor Eric Caine.

Swiss gross domestic product slid 0.2% in the third quarter, joining contractions in Germany and Japan. Here’s why these three countries matter: they are all wealthy, export-sensitive economies whose development depends on the global economy. In Switzerland’s case, exports fell sharply last quarter. Some payback was expected after robust growth earlier this year. And despite last quarter’s fall, Swiss GDP was still up 2.4% from one year earlier. Meanwhile, “October’s foreign trade figures are already indicating a swift recovery,” the Swiss economics ministry said. The bottom line is that the trio of negative reports raises some warning flags for the global economy, but the weakness may be temporary. –Brian Blackstone

TWEET OF THE DAY

In 2018, for the first time less than 10% of Americans reported having changed residences in the past year. Americans are now about half as likely to move as they were in the 1950s. pic.twitter.com/cfWPLCQDJg

General Motors isn't wrong. "And as painful as layoffs and plant closings are, it was a failure to see tougher times ahead that helped send G.M. off a cliff a decade ago. Indeed, G.M. should be commended for its recent strategic decisions," Steven Rattner, lead negotiator for the $50 billion General Motors bailout, says in the New York Times.

U.S. warnings on China's telecoms giant may be working. "The UK and Germany are growing wary of allowing Huawei, the Chinese telecoms company, to install 5G equipment in their countries after a US delegation visited Europe to urge heightened vigilance against national security threats," the Financial Times reports.

Let's hear it for the lone inventor toiling away in his garage. "While patented household innovations do not have the same impact of business innovations their uniqueness and impact remains surprisingly high. Back of the envelope calculations suggest patented household innovations granted between 2000 and 2011 might generate $5.0B in revenue (2000 dollars)," Javier Miranda and Nikolas Zolas write in a National Bureau of Economic Research working paper.

UP NEXT: FRIDAY

Eurozone consumer prices for November are out at 5 a.m. ET.

Canada's gross domestic product for the third quarter is out at 8:30 a.m. ET.

The Chicago purchasing managers index for November, out at 9:45 a.m. ET, is expected to fall to 58.0 from 58.4 a month earlier.

The New York Fed's John Williams speaks on the global economy at 9 a.m. ET.